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Payday lenders that charge 400 percent interest want access to small-business loans

Critics say the industry takes advantage of economic desperation and should cap its interest rates first

A customer leaves a payday loan store in Maryland. The check cashing and payday loan services industry says it is being unfairly excluded from the federal small-business loan program. (Michael S. Williamson/The Washington Post)
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On its website, Payday Money Centers touts the small, short-term loans with a more than 400 percent interest rate it offers consumers through its nearly two dozen California stores.

But with the economy crashing and fewer customers walking through the doors, the 23-year-old payday lender is suing for access to a small-business lending program that charges just 1 percent interest and offers companies the opportunity to have their loans forgiven. Without a $600,000 Paycheck Protection Program loan, the Payday Money Center will be financially crippled, the company said in its lawsuit, filed in federal court in Washington, D.C.

The payday lending industry says it is being unfairly excluded from the $659 billion small-business lending program, which has already doled out more than $500 billion to help 4 million companies hold onto their employees. The program is a key part of the Trump administration’s response to the economic wreckage caused by the spread of the coronavirus, with money flowing to small businesses throughout the country.

“I am struggling to understand the difference between my employees who walk into our store fronts and the employees at the dry cleaners next door,” said Dan Gwaltney, chief executive of Payday Money Centers.

The industry’s efforts have been met with exasperation from consumer advocates who say payday lenders want better treatment than they offer consumers who can be trapped in cycles of debt by their high-cost loans. Instead of receiving a taxpayer bailout, payday lenders should be required to cap their interest rates at 36 percent, a fraction of the industry’s standard rates, they say.

“The last thing the taxpayer needs to support are predatory lenders … especially since they are free to charge sky-high interest rates in much of the country,” said Linda Jun, senior policy counsel at the advocacy group Americans for Financial Reform.

Consumer advocates note this comes as the Consumer Financial Protection Bureau finalizes a roll back of tough industry rules requiring small-dollar lenders to verify consumers could afford to pay back their loans. Payday lenders have said the Obama-era rules would have driven many of them out of business and that consumers are aware of their high-interest rates.

More recently, some lenders have also angered Senate Minority Leader Charles E. Schumer (D-N.Y.) by marketing “COVID-19 Financial Relief” and “Emergency Funding Relief” loans at an 800 percent interest rate. The coronavirus is “creating nefarious opportunity for greedy loan sharks who smell proverbial blood in the consumer waters,” Schumer said.

So far, the industry’s pleas for access to the small-business lending program have fallen on deaf ears at the Small Business Administration, which has also excluded strip clubs, lobbyists and cannabis companies from the program. Spokespeople for the Small Business Administration and the Treasury Department, which helps run the program, didn’t respond to emails seeking comment.

The Paycheck Protection Program offers two-year loans of up to $10 million to companies with fewer than 500 employees. The loans come with a low interest rate, 1 percent in most cases, and if the company uses 75 percent of its money to retain or rehire employees, the loan can be forgiven.

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The program’s initial $349 billion in funding was exhausted in less than two weeks. A second round of funding, $310 billion, isn’t expected to last much longer.

The industry says most of America’s 14,000 payday-lending store fronts are run by small business owners who employ thousands of people across the country and that their exclusion from the program is arbitrary. The Paycheck Protection Program is not a traditional program of the Small Business Administration and shouldn’t be limited by the agency’s lending standards, which exclude payday lenders, industry officials say.

The Financial Service Centers of America and the Community Financial Services Association of America, two large industry lobbying groups, have repeatedly appealed to the Trump administration and Congress for help. They have gathered support from more than 20 lawmakers, including Republican Reps. Blaine Luetkemeyer of Missouri and Barry Loudermilk of Georgia, who sent a letter bolstering their arguments to Treasury Secretary Steven Mnuchin and Jovita Carranza, administrator of the Small Business Administration.

Being excluded from the program will have a “devastating impact” on an industry providing “critical financial services during the COVID-19 emergency,” Edward P. D’Alessio, executive director of the Financial Service Centers of America, said in a letter to Mnuchin and Carranza.

If small-dollar lenders “are unable to remain open and operating due to an unnecessary and illogical regulatory restriction aimed at one of our product offerings, these vulnerable consumers will either be unable to cash their stimulus checks or will resort to unregulated sources for this service,” D’Alessio said. “This is not at all what the CARES Act [or the Coronavirus Aid, Relief, and Economic Security Act] intended."

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Meanwhile, Gwaltney of the Payday Money Centers, says he is running out of time. Gwaltney applied for a $644,382 loan the day the Paycheck Protection Program initially launched, April 3, but was told the company didn’t qualify because it is a lender.

The pandemic has already had a “devastating effect” on business, Payday Money Centers said in a lawsuit filed April 25 in U.S. District Court for the District of Columbia. Payday Money Centers lost about $63,000 in March, $90,000 in April and expects to lose about $100,000 this month as demand for loans plummets and fewer of those who apply qualify, the lawsuit says. “Without a PPP loan, Plaintiff will need to shut down most of its stores and likely its entire business,” according to the lawsuit.

The company has already closed one location and laid off several employees, Gwaltney said. More layoffs and closures will come if the company is unable to secure one of the forgivable loans, he said.

“I am trying hard not to lay off more people anticipating that the judge will make a ruling in my favor,” Gwaltney said.

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Gwaltney said the rules are haphazard. He noted that if lending comprised a smaller part of his business, 49 percent rather than 60 percent, the company would qualify for one of the small-business loans.

“We have competitors who are getting the money that don’t do as much loans,” he said. “I have hope that the federal judge will hopefully understand the fairness factor. This seems like a technicality.”

In its response to the lawsuit, the Justice Department said Payday Money Centers is asking for an unwarranted “dramatic expansion” of the program.

“The funds available for PPP loans are substantial, but not unlimited, and the demand is great,” according to the court filing signed by Assistant Attorney General Joseph Hunt and other Justice Department officials. “Allocating PPP financing to Payday necessarily would come at the cost of denying it to others seeking the same assistance.”